Question

# Find the benefit-cost ratio and profitability index for group’s company startup at an interest rate of...

Find the benefit-cost ratio and profitability index for group’s company startup at an interest rate of 10%

Initial Investment for Company Startup:    \$2,000,000
Anticipated Annual Costs:
Annual Operating and Maintenance Costs   \$20,000
Annual Material Costs           \$50,000
Annual Personnel Costs           \$80,000
Anticipated Revenue:
Year 1:   \$590,000
Year 2:   \$570,000
Year 3:   \$520,000
Year 4:   \$150,000
Year 5:   \$580,000
Year 6:   \$930,000
Year 7:   \$650,000

Costs

Initial Cost =\$2,000,000

Annual Costs:

O&M Costs =\$20000

Material Costs =\$50000

Personnel Costs =\$80000

Total Annual Costs=(20,000+50,000+80,000=150,000)

Benefits

Annual Revenues:

Year 1: \$590,000
Year 2: \$570,000
Year 3: \$520,000
Year 4: \$150,000
Year 5: \$580,000
Year 6: \$930,000
Year 7: \$650,000

MARR=10%

Benefit-Cost Ratio=PW of Benefits/(PW of Costs+ Initial Cost)

PW of Benefits=PW of Revenue

PW of Revenue=590000/(1.1)+570000/(1.1^2)+520000/(1.1)^3+150000/(1.1)^4+580000/(1.1^5)+930000/(1.1^6)+650000/(1.1^7)
=2,719,221.63

PW of Annual Costs=150000(P/A,10%,7)=150,000*4.86841=730261.5

B/C ratio=2,719,221.63/(730,261.5+2,000,000)=2,719,221.6/2,730.261.5=0.99595

B/C Ratio=0.996

Profitability Index=Net Present Worth/Initial Investment

NPW=PW of Benefits-PW of Costs=2,719,221.63-2,730,261.5=-11,039.87

PI= NPW + Initial Investment/Initial Investment=(2,000,000-11,039.87)/2,000,000=0.9949

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